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Loan Agreement

Last revision Last revision 26-03-2024
Formats FormatsWord and PDF
Size Size7 to 11 pages
4.6 - 39 votes
Fill out the template

Last revisionLast revision: 26-03-2024

FormatsAvailable formats: Word and PDF

SizeSize: 7 to 11 pages

Rating: 4.6 - 39 votes

Fill out the template

A Loan Agreement is a written promise from a lender to loan money to someone in exchange for the borrower's promise to repay the money lent as described by the Agreement. Its primary function is to serve as written evidence of the amount of debt and the terms under which it will be repaid, including the rate of interest (if any). The agreement serves as a legal document that is enforceable in court, creating obligations on the part of both the borrower and the lender.

This document can be used to record the terms and conditions of a loan made between individual persons or companies who are Indian residents.

Loans by a foreign lender to an Indian borrower are covered under different rules and regulations made thereunder, and this document has not been adapted to be used for a loan by a foreign lender to an Indian company/individual.

Whether you are lending money to a friend or family member, or it is a commercial loan between two businesses for a specific purpose, this Loan Agreement offers various options. You can choose to make a simple interest-free loan or add and automatically calculate interest. You can also set a repayment schedule, add guarantors, and require the borrower to provide security for the loan.

Collateral and Security of Loan

A loan can be secured or unsecured, i.e. the borrower can provide the lender with security towards repayment of the loan. In the event of failure by the borrower to repay the loan amount, the lender can invoke the security and use it to recover its money.

1. Land and other immovable property—There are some additional formalities to be complied with if the loan is secured by a charge over a property i.e. in case of a default in repayment of the loan the lender would be entitled to sell the property and recover the loan amount, interest, and other amounts payable by the borrower.

Security over real assets i.e. immovable property is created by way of a mortgage. A mortgage (other than an equitable mortgage) for repayment of more than INR100 must be by way of a registered instrument (indenture of a mortgage). A mortgage of immovable property (other than an equitable mortgage) must be registered within 4 months. The loan agreement needs to be registered at the office of the Sub-registrar where the collateral property is located or where any of the parties to the agreement resides.

Certain security interests must also be registered with the Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI). In some cases, prior permission is required to be obtained from the Income-tax authorities for the creation of charges on immovable properties.

2. Movable property such as assets, machinery etc. – Security over movable property can be created by way of hypothecation and execution of a deed of hypothecation.

3. Pledge over shares and other movable assets – Another type of security that is often provided is the creation of charge on financial instruments such as shares of a company.

In case of a charge being created by a company over property or instruments such as its shares, the filing must be made with the Registrar of Companies, regarding the creation of the charge.

It may be noted here that in India, there are laws that regulate money lending and a person/entity in the business of making loans would need to be registered as a moneylender or with the Reserve Bank of India as a banking company or a non-banking financial company.

A guarantor is an individual who promises to pay the amount borrowed by a borrower if the borrower defaults on their loan obligation. This adds to the security of the lender and assures that the loan will be repaid.

How to use this document?

The parties and the guarantor (where applicable) should carefully read this document. The Loan Agreement will be legally binding when it has been printed on non-judicial stamp paper or e-stamp paper, and signed by each party. The value of the stamp paper would depend on the state in which it is executed. Each state in India has provisions in respect of the amount of stamp duty payable on such agreements. Information regarding the stamp duty payable can be found on the State government websites.

Each Party should sign and return a copy of the Loan Agreement. Individuals should ensure that their signature on the document is witnessed by another adult person (over the age of 18).

Where a company is a party to this agreement, they should ensure that the Loan Agreement is signed by an authorized signatory, which is usually a director as authorized by a board resolution of the company.

Where the Lender has requested that the borrower provide a guarantor, such guarantor should also carefully read the entire Loan Agreement and its guarantee obligations, and sign where indicated.

Each Party should keep a signed copy of the Loan Agreement. To do this, two different copies can be signed (or three if there is a guarantor as well), or if only one copy is signed, it can be photocopied and then distributed between the parties.


Applicable laws

This agreement is subject to the broad principles of the Indian Contract Act, 1872.

The Companies Act, 2013 regulates the giving of loans, guarantees, or security by companies to their directors (whether directly or indirectly).

Banks are required to comply with directions issued by the Reserve Bank of India regarding interest rates that can be charged by them.

If the loan agreement is between an Indian citizen and a foreign person the rules and regulations of the Foreign Exchange Management Act, 1999 will apply.


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